What Self-Employed Individuals Need To Know About Audits
Apr. 5, 2020
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While being self-employed can be highly rewarding and exciting—it’s also a great way to draw attention from the Canada Revenue Agency’s audit division. Since freelancers are left to fend for themselves, the likelihood of miscalculation in making deductions and reporting income increases, which might raise an eyebrow or two at the CRA.
This is why it’s important to follow the CRA tax rules down to the T when filing as a self-employed individual.
Let’s discuss everything that you need to know about audits:
The CRA uses audits to ensure that your financial statements are in compliance with the Canadian tax legislation. Audits are typically determined based on risk assessments. If your company has been chosen to be reviewed, in majority of the cases you can respond by submitting documents through the CRA My Business Account. However, in some cases, your account may be chosen for an audit for the initial risk assessment.
The Audit Process
In case the CRA decides to audit you, the auditor will request to see an expansive list of things, such as your personal and business records, receipts, ledgers, credit card statements, contracts, invoices, bank statements and more.
Keep in mind that the CRA is just making sure your records are in line with what you’ve claimed on your tax return, so there’s no need to worry.
If the auditor identifies any missing information, they ask for clarification and if they aren’t convinced, they may deny your claims and recommend your account to be reassessed.
Of course, you can object to the auditor’s findings, provide additional information to the CRA and request them to take a second look at your original assessment.
Common Audit Triggers
If you file a claim that has unusual deductions or credits compared to your previous years, you tax return can be flagged for an audit.
Some common tax triggers that are usually found in self-employed filings include, excessive home office expenses, writing off 100% of your car expenses for business, income discrepancies, abundance of round numbers on your returns, claiming recurring losses or significantly higher income without receipts to back-up your claims.
While being self-employed does increase the likelihood of your tax returns being audited, you can protect yourself and your business by seeking help from a professional bookkeeper or accountant to minimize tax liabilities and ensure compliance with Canadian and U.S. tax rules.
Our tax consultants in Edmonton, Alberta, can help you in the preparation and filing of personal and corporate income tax returns, in addition to CRA income tax audits, appeals and tax court assistance.
Get in touch with us today for Canada and U.S. tax consultancy.